G.R. No.

L-65773-74
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
BRITISH OVERSEAS AIRWAYS CORPORATION and COURT OF TAX APPEALS,
respondents.
April 30, 1987

Facts: British Overseas Airways Corporation (BOAC) is a 100% British Government-owned

corporation organized under the laws of the United Kingdom. It is engaged in the international
airline business and is a member-signatory of the Interline Air Transport Association (IATA). It
operates air transportation service and sells transportation tickets over the routes of the other
airline members. For a nine-month period, partly in 1961 and partly in 1962, when it was
granted a temporary landing permit by the CAB. It did not carry passengers and/or cargo to or
from the Philippines, although during the period covered by the assessments, it maintained a
general sales agent in the Philippines — Wamer Barnes and Company, Ltd., and later Qantas
Airways — which was responsible for selling BOAC tickets.

(CTA Case No. 2373, the First Case)

In 1970, CIR assessed BOAC in the amount of P858,307.79 which it paid under protest. Later
on BOAC filed a claim for refund, which was denied by the CIR in 1972. But before said denial,
BOAC had already filed a petition for review with the Tax Court assailing the assessment and
praying for the refund of the amount paid.

(CTA Case No. 2561, the Second Case)

In 1971, BOAC was assessed for deficiency of income taxes, interests, and penalty for the fiscal
years 1968-1969 to 1970-1971 in the aggregate amount of P549,327.43, and the additional
amounts of P1,000.00 and P1,800.00 as compromise penalties for failing to corporation returns.

BOAC requested that the assessment be countermanded and set aside. CIR denied the BOAC
request for refund in the First Case and re-issued in the Second Case the deficiency income tax
assessment.

BOAC appealed to CTA praying that it be absolved of liability for deficiency income tax for the
years 1969 to 1971. This case was subsequently tried jointly with the First Case.

BOAC’s Contention: BOAC argues that income derived from transportation is income for
services, the place where the services are rendered determines the source; and since BOAC's
service of transportation is performed outside the Philippines, the income derived is from
sources without the Philippines and, therefore, not taxable under our income tax laws.

Tax Court reversed CIR’s decision. CTA held that the proceeds of sales of BOAC passage
tickets in the Philippines do not constitute BOAC income from Philippine sources "since no
service of carriage of passengers or freight was performed by BOAC within the Philippines" and,
therefore, said income is not subject to Philippine income tax. The CTA position was that
income from transportation is income from services so that the place where services are
rendered determines the source.

CIR appealed to SC.

Issue: WON the revenue derived BOAC from sales of tickets in the Philippines for air
transportation, constitute income of BOAC from Philippine sources, and, accordingly, taxable.
Ruling:

Yes. The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here and
payments for fares were also made here in Philippine currency. The site of the source of
payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the Philippine government. In consideration of
such protection, the flow of wealth should share the burden of supporting the government.

The absence of flight operations to and from the Philippines is not determinative of the source of
income or the site of income taxation. Admittedly, BOAC was an off-line international airline at
the time pertinent to this case. The test of taxability is the "source"; and the source of an income
is that activity ... which produced the income.

The tickets in these cases were sold in the Philippines and the revenue therefrom was derived
from an activity regularly pursued within the Philippines. And even if the BOAC tickets sold
covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the
fact that income from the sale of tickets was derived from the Philippines. The word "source"
conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.

SC ordered BOAC to pay its deficiency income tax and its claim for refund was denied.

Supplementary Notes:

*BOAC argued that the JAL vs. CIR ruling is res judicata to the present case.

In JAL vs. Commissioner of Internal Revenue (G.R. No. L-30041) on February 3, 1969,
is res judicata to the present case. The ruling by the Tax Court in that case was to
the effect that the mere sale of tickets, unaccompanied by the physical act of
carriage of transportation, does not render the taxpayer therein subject to the
common carrier's tax. As elucidated by the Tax Court, however, the common carrier's
tax is an excise tax, being a tax on the activity of transporting, conveying or removing
passengers and cargo from one place to another. It purports to tax the business of
transportation. 14 Being an excise tax, the same can be levied by the State only when
the acts, privileges or businesses are done or performed within the jurisdiction of the
Philippines. The subject matter of the case under consideration is income tax, a
direct tax on the income of persons and other entities "of whatever kind and in
whatever form derived from any source." Since the two cases treat of a different
subject matter, the decision in one cannot be res judicata to the other.
Source Principle: